What if Apple Loses Its E-Book Price-Fixing Case?
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The Fiscal Times
June 5, 2013

“We’ll go to an agency model, where you set the price, and we get our 30 percent, and yes, the customer pays a little more, but that’s what you want anyway.”

Those words from Apple’s late founder, Steve Jobs, spoken to publishers and quoted by Jobs’ biographer, Walter Isaacson, are coming back to haunt the company some four years after they were uttered. The negotiations between Apple (NASDAQ: AAPL) and some of the world’s biggest book publishers was rapidly followed by a new approach to e-book releases that caused prices for many books – particularly new titles and bestsellers – to drift higher. The Justice Department last year filed suit against both Apple and the publishers; several of the latter took only days to settle but Apple has held out, arguing it has done nothing wrong and dismissing the allegations as a “bizarre” work of fiction on the part of the DOJ.

The trial, now underway in a Manhattan courtroom, isn’t likely to be the kind of dramatic event featured in a Perry Mason mystery or a novel by John Grisham. The DOJ hasn’t made any secret of the evidence: a pattern of e-mails, statements and other comments by Apple executives that, combined with the fact that e-book prices jumped across the board in the wake of the launch of Apple’s online bookstore, points directly, prosecutors say, to “a scheme to raise e-book prices.” Apple, for its part, says the prosecutors have misquoted and misinterpreted many of those references and drawn misleading and “sinister” conclusions from them.

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In fact, the trial is as much about Amazon (NASDAQ: AMZN) as it is about Apple. Until Apple decided that its upcoming iPad should feature the ability to buy and read books from an Apple store, Amazon’s Kindle and the associated e-bookstore had dominated the nascent market. With 90 percent of the market share, Amazon effectively controlled the prices that consumers paid to download the new James Patterson thrillers onto their Kindles. And Amazon’s goal, businesswide, has been to cut prices to consumers and make up on volume what it forfeits on profit margins.

That was great for book readers, who grew so accustomed to buying a new hardcover book on Kindle for only $9.99 – less than half the cover price – that when prices did rise above that level it sparked a grassroots rebellion with readers posting one-star “reviews” that had less to do with the book’s merits than its Kindle price.

Book retailers and publishers had a growing and compelling interest in breaking Amazon’s de facto e-book monopoly and the model that it was based on – one in which Amazon paid the wholesale price to acquire e-books from publishers, and then set its own price, sometimes at a loss, for selling them via Kindle. That kind of pricing made it more attractive for consumers to fork over the $200 or more that was required to buy a Kindle – the product that Amazon was intent on selling and that back in 2008 and 2009 had only begun to penetrate the market.

For publishers, though, every book buyer who decided to buy a Kindle was a reader who no longer dropped into Barnes & Noble (NYSE: BKS) once or twice a month to pick up three or four newly published books at or close to the full cover price. Deeply discounted e-books made it harder for both bookstores and publishers to convince readers that new titles were worth more than $10 apiece.

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The problem that Apple faces in its defense is that while its new arrangement – an agency model, under which the publisher established a minimum price, with resellers like Apple or Amazon deciding how much profit they will charge over and above that – was more profitable for publishers and booksellers, it just wasn’t a good deal for e-book consumers.

Prior to Apple’s entry into the market – and a related standoff during which Macmillan Publishers refused to sell titles on Kindle until Amazon agreed to this higher pricing – it was rare to find a newly published or bestseller title priced much above $10 or $12. Suddenly, new titles were priced at $14.99 or even more on Kindle, even when the price of the hardcover book hadn’t changed at all. At times, Kindle prices were higher than those for “real” books, known to e-book devotees as “dead tree books,” even though an e-book only rarely gives its reader the right to lend it and doesn’t allow it to be resold. Antitrust cases revolve around whether a pact between companies leads to less competition and thus produces higher prices for consumers. It’s hard to suggest that the attempt by Apple and the publishers to break Amazon’s monopoly didn’t do just that.

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Regardless of the outcome of the trial, which is expected to drag on for the next three weeks, it almost certainly won’t resolve the questions about the economics of e-book retailing. If Amazon’s old model is best for consumers in the short run, giving them access to more books more cheaply than before, it may not be best for Amazon, or the publishers, or even for readers in the long run. If Amazon slices its margins too thinly, its business could end up in trouble one day in the future; if publishers don’t earn a reasonable rate of return on the titles they publish, they can’t take a chance on publishing new authors or works that have a smaller audience. True, e-books have made self-publishing a respectable and viable alternative for many frustrated wannabe novelists, but there is still a role for the professional publisher and editor.

If Apple loses its case, the impact on the company itself will be negligible. Yes, it may open the door to a flurry of class action suits, but the company isn’t a big enough player in the e-book market for this to amount to much. (Apple has plenty of other issues on its plate, including some far more significant ones, from the debate over its tax issues to whether it can launch another game-changing product to follow the iPhone and iPad.)

But if Apple loses, it may raise questions that go beyond e-books to other kinds of content, and the role that content providers can play in trying to collect what they see as a fair return on their investment. As content is delivered digitally, and streaming becomes the norm, the three-way tug of war among creators, vendors and consumers over pricing is only going to become more complex and more heated. The verdict in this case, to paraphrase the words of Winston Churchill (himself a prolific author, whose history of World War II has often been priced at a discount for Kindle owners), won’t mark the end, or even the beginning of the end, but perhaps just “the end of the beginning.”

Business journalist Suzanne McGee spent more than 13 years at The Wall Street Journal before turning to freelance writing. Author of the book Chasing Goldman Sachs, she has written for Barron’s, The Financial Times, and Institutional Investor.